The impact of exchange rates when administering estates

The impact of exchange rates when administering estates

The impact of exchange rates when administering estates2019-10-242019-10-24https://www.lawskills.co.uk/2019/wp-content/uploads/2018/10/lawskills-logo-110h.pngLawskillshttps://www.lawskills.co.uk/2019/wp-content/uploads/Fotolia_69799410_XS.jpg200px200px

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It’s increasingly likely that when administering estates there will be a foreign element to consider. This is due in part to an increase in private clients owning assets in foreign jurisdictions, or beneficiaries residing overseas. More disposable income coupled with cheap fights have in the past made it more attractive to own property overseas. (Unsurprisingly the most popular destinations for Brits who purchase holiday homes are Spain, France and Portugal).

When dealing with the administration of an estate, a Spanish property may need to be sold and the proceeds repatriated to the UK for distribution. Or, there may be a UK estate and a beneficiary living in Australia. Consequently, we’re starting to see that foreign exchange is becoming more and more frequent when administering estates. If you haven’t yet dealt with a case containing foreign assets before, it’s more likely that you will in the future.

Practitioners can continue to preserve the value of the estate if their firm is set up to make and receive international currency payments that are in the interest of clients and beneficiaries. Beneficiaries typically save up to 3% of the amount transferred when funds are converted from one currency to another by using Currency Index compared with high street banks.

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Case Study

The beneficiary of an estate resides in Australia and inherited £800K following the sale of a property in London. The beneficiary wished for the funds to be transferred to their account in Australia.

Amount in GBP

Exchange Rate

Amount beneficiary receives

Bank

£800,000

1.7743

AU$ 1,419,440

Currency Index

£800,000

1.8272

AU$ 1,461,440

By using Currency Index to convert the currency instead of the high street bank, the beneficiary is AU$42,300 better off.

Best practice

Once the firm is set up to make and receive international payments at preferential exchange rates, beneficiaries can be asked whether they wish funds to be transferred via the high street bank or the currency specialist. Making the beneficiary aware that there is a more cost-effective option, satisfies both SRA accounts rules and demonstrates to the client that their best interests are being considered.

International conveyancing and reducing risk

Uncertainty over Brexit has caused the pound to devalue against the euro quite significantly. For example, in May 2019 a €300K French property cost £256K, whereas in August 2019 the same property would cost the buyer £277K – a cost increase of £21K.

For those who are actively seeking to purchase property in Europe, fluctuations in exchange rates such as this can represent real risk to buyers because of the time delay (often 2-3months) between committing to purchase a property and completing.

One of the tools available to property buyers to remove this risk is a ‘forward contract’. Forwards can be described as ‘buy now, pay later’ contracts and are used to ‘fix’ the exchange rate for a time in the future. Exchange rates can be fixed for up to 2 years in advance, giving peace of mind that no matter how negotiations between Boris and his European counterparts go, overseas property purchases remain affordable and within budget.

Limit orders

While fixing exchange rates can be a great way to remove risk, how does one decide on the right time to commit? The currency markets are constantly moving and can be very volatile, providing short term spikes in rates, which can provide good buying opportunities. However, spikes can be very short lived and can sometimes occur outside normal office hours, which is where a limit order comes in. Clients can give instruction to buy/sell a certain amount of currency at a desired exchange rate. This order remains active 24/7 and will automatically buy currency if the desired rate becomes available.

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